"Solvency II" Phase 2 has a gradual impact, and insurance funds face no systemic deleveraging pressure.

Recent market rumors suggest that “small and medium insurance companies are reducing their holdings due to new solvency regulations, causing market volatility.”

In response, an industry insider told the Daily Economic News that attributing the short-term market fluctuations mainly to “insurance capital reduction” is not sufficient. On one hand, the full implementation of the “Solvency II” (China’s risk-based solvency system) Phase II will indeed have a significant impact on insurance companies’ investment behaviors, but this impact is fundamentally structural and gradual, not a short-term trigger for passive reduction of holdings. On the other hand, the idea that “reductions by small and medium insurers lead to market declines” is more likely an exaggerated interpretation of localized phenomena, and does not have overall explanatory power.

“There are also reduction phenomena, but their scale is limited, so there’s no reason to believe that insurance companies’ actions are causing the stock market to fall,” said an investment professional from an insurance company. A securities analyst also analyzed that for large and medium-sized insurers, which hold over 70% of the funds and have already implemented the new regulations by the end of 2025, the actual pressure to reduce holdings is not significant.

The related impacts have already been gradually reflected

Recently, market volatility in stocks and bonds has intensified, drawing attention to the behavior of insurance funds as core incremental capital.

Regarding the rumors about the implementation of the “Solvency II” regulatory rules, Ge Yuxiang, a non-bank financial analyst at China Securities, pointed out that the transition period for “Solvency II” has been extended to the end of 2025, and no new regulations will be fully implemented in 2026. The consultation draft of the third phase of “Solvency II” is currently under internal regulatory testing.

In March 2012, the former China Insurance Regulatory Commission launched the construction of China’s risk-based solvency system; in 2016, Phase I of “Solvency II” was officially implemented; by the end of 2021, the former China Banking and Insurance Regulatory Commission issued the Insurance Company Solvency Regulatory Rules (II), which clarified that from the first quarter of 2022, Phase II of “Solvency II” would be enforced, with full implementation required by 2025 at the latest.

Postdoctoral researcher and professor Zhu Junsheng from Peking University’s School of Economics told Daily Economic News that overall, the full implementation of “Solvency II” Phase II will indeed have an important impact on insurance companies’ investment behaviors, but this impact is essentially a structural and gradual adjustment, not a short-term trigger for passive reduction of holdings.

Zhu believes that the new regulations aim to strengthen capital constraints related to interest rate risk, equity risk, and credit risk, primarily guiding insurers to return to asset-liability matching (ALM) orientation and shifting investments from “scale-driven” to “sound management.” In terms of specific allocations, it is not simply about reducing equity assets but about shifting equity investments from high-volatility, trading-oriented assets to low-volatility, dividend-paying, allocation-type assets. It also emphasizes increased allocation to long-term fixed income assets and imposes higher risk penetration and capital constraints on alternative investments.

More importantly, since 2022, the “Solvency II” Phase II has entered a continuous digestion stage with a transition period, and its effects have been gradually reflected over the past few years, rather than being concentrated at this moment.

Large and medium-sized insurers face limited reduction pressure

Zhu also stated that the market’s claim that “small and medium insurers reduced holdings at the end of Q1 due to solvency pressure, causing market fluctuations” should be viewed more cautiously.

“In reality, only some small and medium insurers with marginal solvency pressure, high equity holdings, or liquidity constraints may have made phased asset adjustments. This is an individual behavior and not industry-wide, nor can it form a systemic reduction force,” he said. Overall, insurance funds remain predominantly long-term allocation capital, with continuous inflows from liabilities, which determines their main strategy of stable incremental investment rather than high-frequency trading. Meanwhile, the overall size of small and medium insurers is limited, so their marginal rebalancing actions have limited impact on the market.

Ge Yuxiang also told reporters that objectively, some small and medium insurers may face certain performance realization pressures, but considering that “Solvency II” introduces counter-cyclical adjustments to stock investment risk factors, it reduces insurers’ impulse to chase gains and sell off in panic. For large and medium insurers that hold over 70% of the funds and have already implemented the new rules by the end of 2025, the actual pressure to reduce holdings is not significant.

According to data from the China Banking and Insurance Regulatory Commission, by the end of 2025, the total balance of insurance funds used will reach 38.5 trillion yuan, a 15.7% increase from 2024. Among these, the equity funds invested in stocks and funds amount to about 5.7 trillion yuan, up approximately 39% year-on-year, an increase of about 1.6 trillion yuan compared to the previous year. This growth includes new capital inflows and gains from the appreciation of equity assets themselves.

According to estimates by China Securities, about two-thirds of this increase is due to market value fluctuations, and one-third is due to active rebalancing. Under a neutral assumption for 2026, the total incremental stock and fund capital is estimated at about 713.3 billion yuan.